Sales Training And Community Expansion Will Unlock Housing Market Potential

Key Takeaways

• Expanding community count and sales training could drive revenue growth through increased sales and improved conversion rates.
  
• Strong backlog and entry-level home demand position LGI Homes for sustained long-term revenue growth.
  
• High rate volatility, increased incentives, and cost pressures due to tariffs undermine revenue and margins, creating execution risks and impacting earnings growth.

Catalysts

Engages in the design, construction, and sale of homes in the United States.

• LGI Homes is expanding its community count significantly, with a 22% increase over the prior year, setting the stage for potential revenue growth as these new communities start generating sales.
  
• The company is investing in intensive sales training for its sales leaders and teams, which is expected to enhance their performance and agility, leading to potentially improved sales conversion rates and higher revenue growth.
  
• LGI Homes has a strong backlog of homes, with 1,040 homes in backlog representing over $406 million, which indicates a positive future revenue stream as these homes are completed and delivered.
  
• Despite short-term challenges, LGI Homes is positioned to benefit from the persistent shortage of entry-level homes in the U.S., which supports long-term demand and potential future revenue growth as the company continues to address this market need.
  
• With a focus on maintaining affordability through financing incentives and rate buy-downs, LGI Homes could enhance its competitive position and possibly improve sales volume, positively impacting future revenues and earnings.

LGI Homes Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming LGI Homes's revenue will grow by 16.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 8.5% today to 7.3% in 3 years time.
• Analysts expect earnings to reach $247.7 million (and earnings per share of $10.23) by about April 2028, up from $183.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.9x on those 2028 earnings, up from 7.0x today. This future PE is greater than the current PE for the US Consumer Durables industry at 8.9x.
• Analysts expect the number of shares outstanding to decline by 0.69% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.91%, as per the Simply Wall St company report.

LGI Homes Future Earnings Per Share Growth

Risks

• High rate volatility continues to affect buyers' ability to purchase homes and impacts their confidence, potentially leading to decreased revenue from fewer home closings.
  
• The onetime expense related to the forward commitment incentive program and increased selling incentives have weighed on revenue and gross margins, affecting net margins negatively.
  
• Continued cost increases due to tariffs and market uncertainty could pressure gross margins further, potentially impacting overall earnings.
  
• A sluggish start to the year and reliance on increased community openings and staffing proficiency to meet closing targets could create execution risks, affecting revenue predictability.
  
• The increasing necessity to offer larger sales incentives to remain competitive in a challenging market could further erode gross margins, hindering earnings growth.

Valuation

• The analysts have a consensus price target of $106.667 for LGI Homes based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $140.0, and the most bearish reporting a price target of just $65.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.4 billion, earnings will come to $247.7 million, and it would be trading on a PE ratio of 12.9x, assuming you use a discount rate of 10.9%.
  
• Given the current share price of $54.64, the analyst price target of $106.67 is 48.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.